PE Week Wire: Wednesday, October 8, 2008

Last month, I wrote that TPG Capital’s $1.35 billion infusion into Washington Mutual was the worst private equity deal in history. Keeping with the theme of sweeping characterizations, TPG also seems to have been involved with the strangest venture capital deal in history. But TPG wasn’t actually the odd actor this time around. That dishonor goes to Highland Capital Partners.

I hate to kick a firm after it plied me with liquor and Wolfgang Puck food, but this is so bizarre as to give me no other choice…

Lexington, Mass.-based Highland earlier this year invested $20 million as part of TPG Capital and Apollo Management’s $17.1 billion buyout of Harrah’s Entertainment Inc. Let that sink in for a moment. An early-stage and growth-stage VC firm participated in a massive take-private acquisition in exchange for much less than a 1% equity stake. The $20 million check is virtually insignificant to mega-LBO firms like TPG and Apollo, but represented more than 2% of Highland’s current fund (note: Harrah’s is in Highland’s general fund, not its Tom Stemberg-led consumer fund).

Highland is clearly embarrassed by the deal, which it has already marked down significantly. You can’t find mention of it on the firm’s detailed website, and the firm’s normally-receptive spokesman has not returned any of my calls of emails (nor has partner Bob Davis, who led the transaction).

So why did Highland do it? That’s the $20 million question, and unfortunately I don’t have a terribly compelling answer. A few folks who attended Highland’s annual LP meeting say they were told that the deal would provide Highland portfolio companies with a big foot in the door at Harrah’s when it comes to future partnerships, contracts and/or acquisitions – particularly in terms of online gaming. Let’s hope those LPs are wrong, because the theory is full of more holes that a Caddyshack golf course. After all, why not then also buy $20 million of Microsoft stock. Or of Cisco, Google, Johnson & Johnson, etc.?

Maybe it was just a question of personal relationships. HBS professor Walter Salmon is a “merchandising domain expert” with Highland Consumer Fund, and once served on the Harrah’s board of directors. Moreover, current Harrah’s CEO Gary Loveman last year bought a 2.4% stake in the Boston Celtics, which happens to be run by Wyc Grousbeck, a former Highland partner who currently serves as an advisor. Again, I hope this isn’t the reason either – particularly because the existing Loveman relationship would negate any “foot in the door” rationale.

All of this leaves me at a loss. Every VC firm has plenty of bad deals, and Harrah’s will probably fall into that bucket for Highland. But this one is different because there seems to be no clear strategy, or at least one that would justify investment by a venture capital firm.

Sources I spoke to could come up with only semi-comparable, which was when Battery Ventures teamed up with The Blackstone Group to invest in the London International Financial Futures and Options Exchange. The differences there, however, were that the total deal was for just $91 million, and it was a situation in which Battery sourced the deal and brought it to Blackstone. In the case of Harrah’s, it was a competitive auction process that ultimately generated billions of dollars. Apples and grapefruits.

If anyone can make sense of this transaction – that includes you, suddenly-silent Highland – I’m all ears…

*** Yup, Tom Brokaw’s first non-audience question last night was about who Obama and McCain would pick as Treasury Secretary. They both basically punted, after invoking Warren Buffett and (McCain only) Meg Whitman.

*** Last week, we reported some top-line Thomson Reuters data about Q3 M&A and private equity deal activity (both U.S. and global). A bunch of you have requested more detailed numbers, preferably in some sort of downloadable format that can be sent to friends and neighbors. Sounds fair, so I’ve posted a 40-page PDF file over at peHUB.

Top Three

Silver Spring Networks, a Redwood City, Calif.-based provider of smart grid technology solutions, has raised $75 million in new VC funding. Kleiner Perkins Caufield & Byers led the round, and was joined by return backers Foundation Capital, JVB Properties and Northgate Capital. A portion of the $75 million has been reserved for “strategic partners.” The company had previously raised over $90 million.

Tyco International has acquired Vue Technology Inc., a Lake Forest, Calif.-based provider of item-level RFID software and infrastructure solutions, for approximately $43 million in cash. Vue Technology had raised around $14 million in VC funding from firms like Canaan Partners, Partech International and Marubeni Corp.

Quantum Energy Partners has secured $2 billion in LP commitments for its fifth fund, peHUB reports. It will use rolling closes until reaching its $2.75 billion target.

VC Deals, a Chinese video sharing site, is raising $20 million in third-round funding. It had previously raised over $21 million from firms like Softbank China Venture Capital, BlueRun Ventures, DFJ and Dragon Ventures.

Kineto Wireless Inc., a Milpitas, Calif.-based provider of mobile over wireless LAN solutions, has raised $15.5 million in Series D funding. Motorola was joined by return backers Oak Investment Partners, Sutter Hill Ventures, Venrock, Seapoint Ventures and InterDigital Communications Corp. The company has now raised around $103 million in total VC funding since its 2001 inception.

Nimsoft, a Redwood City, Calif.-based provider of IT service-level management solutions, has raised $12 million in second-round funding. Goldman Sachs led the deal, and was joined by return backers JMI Equity and Northzone Ventures. It had previously raised a $10.3 million Series A round, and acquired Fort Collins, Colo.-based competitor Indicative Software for an undisclosed amount.

Melodis Corp., a San Jose, Calif.-based provider of online music search technology, has raised $7 million in Series B funding. TransLink Capital led the round, and was joined by JAIC America and return backer Global Catalyst Partners.

Tribilis Mobile, a San Mateo, Calif.-based publisher of interactive network applications for mobile phones, has raised $5.7 million in Series B funding. Altos Ventures led the round, and was joined by ATA Ventures and individual angels.

Ala TV, a cable television operator in Kyrgyzstan, has raised $5 million in VC funding from the Aureos Central Asia Fund.

Odyssey Thera Inc., a San Ramon, Calif.-based provider of drug development technology, has raised an undisclosed amount of new VC funding. Merck & Co. was joined by return backers Burrill & Company, HBM Partners and Healthcap. The company had previously raised around $18 million.

VisualShare Inc., a Salt Lake City-based provider of SaaS solutions for multi-user image collaboration, has raised an undisclosed amount of seed funding from Salt Lake Life Science Angels.

Buyout Deals

American Industrial Partners is in talks to buy Mark Andy Inc. from Morgenthaler Partners, according to Buyouts. No financial terms were reported. Mark Andy makes printing equipment for the tag and label industry.

Monomoy Capital Partners has received bankruptcy court approval to acquire the molded plastics business of Atlantis Plastics Inc. for $20.7 million. The court also signed off on AEP Industries Inc. (Nasdaq: AEPI) buying Atlantis Plastics’ plastic films unit for $87 million in cash.

Oaktree Capital Management has agreed in principle to invest $3 billion into South Korea, as a joint venture with country’s state-run pension agency.

PE-Backed IPOs

Aldagen Inc., a Durham, N.C.-based developer of clinical-stage regenerative therapies, has withdrawn registration for an $80.5 million IPO, due to “market conditions.” It had planned to trade on the Nasdaq, with Wachovia Securities and Cowen & Co. serving as co-lead underwriters. Aldagen has raised around $65 million in VC funding since 2000, from firms like Intersouth Partners (41.6% pre-IPO stake), Harbert Venture Partners (14.7%), The Aurora Funds (12.3%), Tullis-Dickerson (9.3%) and Trelys Funds (5.4%).

PE Exits

21 Centrale Partners has sold AFU, Lloyd’s largest approved coverholder in France, to Amlin PLC. No financial terms were disclosed.

Comcast Corp. has agreed to buy Radiance Technologies Inc., a Los Altos, Calif.-based provider of digital delivery solutions for the advertising and enterprise sectors. The deal is valued at around $5 million. Radiance had raised over $26 million in VC funding since 2000, including a round last year at a $34 million post-money valuation. Backers included Sutter Hill Ventures, Levensohn Venture Partners and Chevron Technology Ventures.

Teleflip, a Santa Monica, Calif.-based provider of free email service to mobile phones, has sold its assets to an undisclosed buyer. The company had raised nearly $5 million in private equity and debt funding from firms like GRP Partners and Hercules Technology Growth Capital. In a statement, Hercules said that Teleflip had been written down to a fair value of $0.00 in the first quarter of 2008, and that the sale represented a recovery of $0.02 per share in NAV.

PE-Backed M&A

Circassia Ltd., an Oxford, England-based drug company focused on controlling immune system responses, has acquired the U.S., Canadian and Japanese development and commercialization rights to dopexamine from Ipsen. No financial terms were disclosed. Circassia has raised around $22 million in VC funding from firms like Goldman Sachs, Invesco Perpetual, Imperial Innovations and Lansdowne Partners.

Firms & Funds

Kayne Anderson Capital Advisors is nearing a final close on its fifth energy-focused private equity fund, according to peHUB. The effort has a $1.6 billion target, and is loosely slated to finish up on Nov. 20.

RLJ Equity Partners, a private equity firm headed by BET founder Robert Johnson, has secured three-quarters of its $300 million target, according to LBO Wire. Limited partners include General Electric.

The Kansas Public Employees Retirement System has approved a $25 million commitment to TowerBrook Investors III, a private equity fund managed by TowerBrook Capital Partners.

Human Resources

Gregory Feller has agreed to join UBS as a New York-based managing director of technology investment banking. He previously was with Lehman Brothers.